Taper today or taper delay, that is the question?

Submitted by Michael Hewson on Wed, 18/09/2013 - 05:40

So here we are, the day has finally arrived and today’s FOMC meeting is likely to answer the ever present question that has been at the forefront of markets thinking since the last Fed meeting at the end of July.

We’ve heard ad nauseam over the past few weeks from various Fed officials that any taper is data dependant, with St Louis Fed President James Bullard particularly forceful in saying that the Fed needs to see more data. Even the Chicago Fed’s Charles Evans, who is known for his dovish stance, has stated that he is leaning in the direction of some form of tapering by year end if Q3 data supports it.

Given the Fed’s dual mandate on employment and inflation these areas of the economy have been closely scrutinised for evidence of a pickup in the jobs markets amidst concerns about deflation.

If we’re talking purely about the economic data then you would have to argue that a taper is not warranted, especially given last month’s payrolls revisions which threw a massive fly in the proverbial ointment, with the July revision to 104k from 162k. Inflation is also showing signs of slowing suggesting an increasing deflation risk.

The consensus so far appears to be in the region of $10bn to $15bn taper of treasury purchases, though even that has come down and $5bn has been mentioned. If we’re talking numbers in the region of $5bn, then the argument really has to be why bother. It would be better to wait given that the market reaction would probably not be that much different than if the Fed did nothing.

Most voting members have been at pains in recent weeks to suggest that a taper is coming, but nearer to year end which would seem to suggest that a lot of previously dovish voting members would have to move closer to the hawks’ camp, for a September taper to occur.

That could be a big ask and if we do get a taper we could well get significant dissent on timing and amount, which in itself could be perceived as a negative for markets.

Consensus for a taper has been built by those who argue that the fall in the unemployment rate to 7.3% partially fulfils the requirements for an easing of monetary stimulus, but that conveniently ignores the fact that the participation rate is at levels last seen in 1978, hardly a credible economic argument.

By that argument further falls in the participation rate are a good reason for an improvement in the labour market, because it would mean unemployment would fall closer to 7%. Bernanke himself stated, earlier this year that the current unemployment rate did not fully reflect the health or otherwise of the US jobs market.

Weekly jobless claims remain a bit of an outlier on this one as they continue to improve on a week to week basis, but arguments for a beginning to tapering also ignore a forthcoming event which could well provoke a significant amount of volatility in October, namely the debt ceiling debate.

The Fed might perceive that it would be safer to wait for markets to move past this particular roadblock before embarking on the start of a tapering program, and Bernanke’s press conference today could well layout a timetable for tapering, along with revised economic forecasts and low rate guidance into 2016. A forward guidance on tapering if you like, starting in October.

Before that we have the small matter of the latest Bank of England minutes which given recent data could well see more divergence on member’s views about the policy of forward guidance than was evident at previous meetings.

The lone dissenter at the last meeting was Martin Weale and his dissent revolved around the durability of the guidance into 2016, given the strength of the current recovery in some of the economic data. His scepticism appears to have been well founded and it wouldn’t be too much of a surprise if he were joined in his dissent by other policymakers, given the recent strength in some of the employment data.

EURUSD – the euro is currently finding support above the 1.3320 and needs to push beyond the larger resistance area at the 1.3400 level to target 1.3500. We can fall back to the 1.3180 level without undermining the prospect of a higher euro. Only below the 1.3180 level retargets the 1.3000 level.

GBPUSD – last weeks close above the 200 week MA at 1.5740 opens up a scenario for a move towards the 1.6000 level, and possibly 1.6120. Monday’s move above the February highs at 1.5880 is now set to be the initial support to set up just such a move. Only a move back below the 1.5740 area would have the potential to delay this move higher. The medium up trend support now comes in at 1.5660 from the 1.4815 lows.

EURGBP – Fridays break below the 0.8390 area now opens the prospect of a move towards the 0.8320 area and on the way to the 0.8280 level, 50% retracement of the 0.7755/0.8815 up move. As long we stay below the 0.8480/90 area and 200 day MA the outlook remains bearish.

USDJPY – the US dollar continues to look as if it could roll over after last week’s test of the 100.50 level. Last week’s failure to take out the 100.50 level conclusively means the risk of a pullback towards 98.40 remains a possibility. The long term triangle target remains at 108.00, but we need to get back to the May highs at 103.75 first. The only concern is the stalling of momentum which could see an increasing risk for a move back below 98.80 undermining this scenario and arguing for a test back towards the 97.00 level.

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